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Weber Questions

1a. Describe one idea from Weber that you find especially compelling, and one that puzzles or doesn’t convince you.

1b. What lessons about rule-making and rationalization can be drawn from the five cases in 12.2.2?

Welch Questions

2a. How did Welch and GE exemplify big business trends of the 1980’s and 90’s?

2b. Why was Welch once hailed as the manager of the century?

2c. Is it fair to blame Welch for GE’s decline and fall after he retired? Why or why not?

Downsizing Questions

3a. What are the dangers of using Downsizing as a means of improving profits?

3b. Suppose you rented an apartment to a family for15 years, then decided you could make more money by converting it into something else. Would you feel you had any ethical responsibilities to the family beyond what is required by law?

3c. Do you agree with Orlando’s overall argument? Are there any flaws that you’d like to address?

Rank & Yank Video & Questions

“Rank and Yank, with an Ethical Discussion” (YouTube, 5:41 min.)

4a. Why do Rank and Yank’s advocates support it? How does it relate to Pareto’s 80-20 Rule?

4b. Imagine you were hired at Amazon, fulfilled your responsibilities, and then fired because others fulfilled their responsibilities better. Does this make sense ethically?

4c. You are a manager at a Rank and Yank company. You oversee a strong team of about 20 people, and you’d like to keep them all. Would you intentionally hire a pair of poor candidates for open positions, with the idea that next year they will be designated for firing? If not, how else might you try to protect your team?

Woke Capital Questions

5a. Why do Douthat, Lewis, and Beam argue that a corporation being Woke is compatible with the ruthless pursuit of profit? Is the problem with Woke ideology, corporate cynicism, or both?

5b. What factor is most to blame for driving Cancel Culture? Lewis blames (1) Corporate public relations but (2) Woke activist intolerance and (3) the rise of Social Media are also factors.

5c. In what ways is getting Woke either beneficial or harmful for an organization?

Advertising Questions

6a. Do you think Ben and Jerry’s were guilty of Greenwashing in their marketing of Rainforest Crunch ice cream?

6b. Among the cases described in the Woke Advertising section, which company stands out as worst in ether moral or business terms?

6c. What advice would you give either Gillette in their marketing to men, or Nike in their marketing to women?

Corporate Activism Questions

7a. In the Southern Steel Case, did CEO Weston do the right thing?

7b. Why is Ramaswamy concerned that Expanded Stakeholder Theory might lead corporations to become monsters? Would you agree?

7c. Does Doyle improve on Ewing’s pre-internet bill of rights? Or do some parts of his pledge go too far?

Unit Twelve: Trends – Rationalization, Leaner & Meaner,
Woke Capital
12.0 Introduction
This concluding unit was added in Spring 2022. Instead of separate
readings, it features excerpts and cases embedded in the notes. Unlike the
topical focus of the previous units, the organizing principle here is
more historical, looking at three trends – (1) Weber’s Rationalization, (2)
Leaner and Meaner, (3) Woke Capital – in relation to the question of whether
business is becoming more ethical. Many course themes and concepts
are revisited or extended, so this final unit also helps with review.
Learning Outcomes
After completing this unit you will be able to:
•
Debate whether business is becoming more ethical in terms of
three trends.
•
Explain and draw lessons from Weber’s main concepts such as
rationalization.
Describe how big business got leaner and meaner in the 80’s and
90’s, and debate issues of CEO pay, downsizing, and rank and
yank.
Define woke social justice and understand its impact on
corporate public relations, advertising, and stakeholder theory.
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Readings
The readings and cases are short excepts embedded in the notes. The longest has its
own sub-section: 12.2.2. Edward Royce, Classical Social Theory and Modern
Society. Lanham: Rowman & Littlefield, 2015, p.91-93, 96-98, 101-15, 149-57, 26467.
Videos
“Sociology: Max Weber” (The School of Life, YouTube, 7:22
min.) https://www.youtube.com/watch?v=ICppFQ6Tabw
“Iron Cage” (Sociological Dictionary, YouTube, 10:41
min.) https://www.youtube.com/watch?v=KKgHSY3Yy3A
Rank and Yank, with an Ethical Discussion (YouTube, 5:41
min.) https://www.youtube.com/watch?v=irvOGDgt08s
“Pepsi, Kendall Jenner Protest Ad called Tone Deaf” (YouTube, ABC News,
2017, 4.49 min.) https://www.youtube.com/watch?v=U8y9i1gkAFQ
“We Believe: The Best a Man Can Be” (YouTube, Gillette, 2019, 1:44
min.) https://www.youtube.com/watch?v=koPmuEyP3a0 (original, now unlisted)
or https://www.youtube.com/watch?v=UYaY2Kb_PKI (copy, Guardian News)
“Nike – Dream Crazier” (YouTube, 2020, 1:30
min.) https://www.youtube.com/watch?v=zWfX5jeF6k4
Glossary Terms
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Bureaucracy
Formal vs. Substantive Rationality
Iron Cage
Protestant Ethic
Rationalization
———Downsizing
Leaner and Meaner
Rank and Yank
Teleopathy
Cases – Safeway, General Electric
———Cancel Culture
Greenwashing
Rebel Sell
Social Justice-Seeking Paradox
Stakeholder Theory (Classic vs. Expanded)
Woke (aka Social Justice)
Woke Capital vs. Get Woke, Go Broke
Cases – Ben and Jerry’s, Pepsi, Gillette, Nike, Southern Steel
Persons of Note
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Douthat, Ross
Machiavelli, Niccolo
Ramaswamy, Vivek
Weber, Max
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Welch, Jack
12.1 Moral Progress: Is Business Becoming More Ethical?
In the late 2010’s, I noticed a common theme in several student essays. They
assumed that the thinking of Friedman and Carr was a thing of the past, and
business today was governed by CSR and the “triple bottom line” of people and
planet as well as profit, and thus had advanced from the behaviour that caused so
many scandals covered in the course. I regarded such optimism as a bit naive, but
it got me thinking about the historical question of whether business is becoming
more ethical.
Preliminary Analysis – Progress, Standard of Ethics
First, some analysis of terms. What would it mean for business to “progress in
ethics” over time? Progress implies change, so we’d have to identify some major
trends in business over a certain period and ask whether they were positive or
negative. The dominant trends identified would be very different if we considered a
period of 150 years (since the 1870’s), or 50 years (since the 1970’s), or just the
past 15 years.
We’d also have to decide on a standard of business ethics, which we could take
from the discussion of Stakeholder theory and Carroll’s CSR Pyramid (Unit 5).
Something like: successfully producing goods and services, following ethical
and legal norms, and treating employees, customers, and other
stakeholders well. Such a standard, I believe, would correlate strongly with the
broader ethical-political standard: how well are our business and economic
institutions promoting human flourishing?
Is Change Cyclical or Linear?
Progress implies development from A to B. But perhaps change is more cyclical
than linear. A recent history of business ethics covering the 1850’s to the 1930’s
makes this very point:
“Indeed, my narrative shows that many of today’s business ethics debates and
many of today’s solutions were already debated and already proposed one hundred
years ago or so. … I show that things are older than is thought, what is thought to
be new has already happened before; we have been there already.” (Gabriel
Abend, The Moral Background: An Inquiry into the History of Business
Ethics. Princeton: Princeton University Press, 2014, p.13.)
For example, today’s advocates of stakeholder theory and CSR try to show that
good ethics is good business, just as Rotary (a club for businessmen which
promoted ethics) was founded more than 100 years ago on the slogan, “He Profits
Most Who Serves Best.”
Likewise, recent decades have been marked by a cycle of business scandals (like
Enron), followed by concerns about declining ethical behaviour, and calls for
renewed investment in promoting business ethics. But this cycle was already
underway in the first decades of the 20th century, when journalists known as “the
muckrakers” uncovered abuses (such as 1906 food safety scandal), which tarnished
the image of business and lead to calls for more regulation and more ethics (see
Unit 5.3.2). It was in this era that organizations like the Chamber of
Commerce and the Better Business Bureau were founded, both to uphold
ethical standards and uphold the reputation of business.
Sweatshop Fires
Sometimes we make progress over decades, but then the game changes, and we
wind up back where we started. Recall the Unit 1 discussion question about
the Triangle Shirtwaist Factory Fire (1911), which inspired American reforms in
worker safety, union rights, and ending sweatshop conditions. But then garment
worker jobs moved to the Third World, and history repeated itself in the Dhaka
Fire (2010) a century later in Bangladesh. (Triangle Returns, YouTube, 9:18
min., optional. https://www.youtube.com/watch? )
Three Trends
In Unit 12, we’ll examine three major trends that must be understood when trying
to evaluate changes in the ethical direction of North American business. In 12.2,
we’ll look at Weber’s concept of Rationalization, which has been impacting
capitalism, industry, and management for at least 150 years. In 12.3, Leaner and
Meaner, we’ll look at how business became harsher and more shareholder-driven
in the period 1975 to 2008. In 12.4, Woke Capital, we’ll look at the recent trend
for corporations to be outwardly concerned with a certain type of “social justice”
and why this isn’t as positive as one might think.
12.2 Weber & Rationalization – Protestant Ethic, Iron Cage
Max Weber (1864-1920) was a German social theorist (thus his name is
pronounced Veyber) – a major figure in sociology, economic history, political
science, and organizational theory. His thinking is concerned with the transition
from traditional to modern society, which he saw as a process
of rationalization. This is present in capitalist business, industrial production,
management practices, and bureaucratic administration.
What Weber calls rationalization has come up several times in this course
(without being named as such). In Unit 5.3, we explained how ethical norms, which
once were left to personal discretion, increasingly become a matter of law. For
example, society moved from the traditional doctrine of caveat emptor (buyer
beware) to establish extensive health and safety regulations protecting
consumers. Similarly in Unit 9.1, we saw how the idea of employment at will was
limited by unionization and anti-discrimination law which afforded certain rights to
workers..
In Unit 6.1, we saw how professionalization grew in the 20th century, as more
jobs come to require extensive academic training and certification, and are
subject to regulation by professional codes. We noted that many production
processes that once relied on skilled craftsmen came to be ordered by scientific
management practices into mass production assembly lines.
What is Rationalization?
What do the above developments have in common? They all involve a systematic
ordering through explicit rules and standardized procedures. Such
rationalization takes many forms. Weber calls it the master process of
modernity, reshaping business, the professions, and society.
Rationalization in Weber’s sense is economic and sociological (making a
company or process more efficient, a system more consistent, or moving away
from tradition and emotion as motivators to rationally-based concepts). It
doesn’t refer to the psychological sense of the term (trying to justify an attitude
or behaviour logically when its real basis is deeper or unconscious).
The Protestant Ethic
Weber’s most famous book is “The Protestant Ethic and the Spirit of
Capitalism” (1905). It poses the question: Why did capitalism first arise in
Protestant countries such as Britain, the Netherlands, Germany, and the United
States?
Weber’s answer is that capitalist economic developments grew out of a
particular Protestant religious ethos which valued hard work in the service of
a calling or vocation, and saving money rather than spending it on
frivolous enjoyments. This work ethic defined the spirit of capitalism from the
16th century Reformation until the rise of the consumer society, mass affluence and
the welfare state after World War II. Weber concludes on a note of pessimism:
“The Puritan wanted to work in a calling; we are forced to do so. For
when asceticism was carried out of monastic cells into everyday life, and began to
dominate worldly morality, it did its part in building the tremendous cosmos of
the modern economic order. This order is now bound to the technical and
economic conditions of machine production which today determine the lives of all
the individuals who are born into this mechanism, not only those directly concerned
with economic acquisition, with irresistible force. Perhaps it will so determine them
until the last ton of fossilized coal is burnt. In Baxter’s view the care for external
goods should only lie on the shoulders of the ‘saint like a light cloak, which can be
thrown aside at any moment’. But fate decreed that the cloak should become
an iron cage. …
No one knows who will live in this cage in the future, or whether at the end of this
tremendous development entirely new prophets will arise, or there will be a great
rebirth of old ideas and ideals, or, if neither, mechanized petrifaction, embellished
with a sort of convulsive self-importance. For of the last stage of this cultural
development, it might well be truly said: ‘Specialists without spirit, sensualists
without heart; this nullity imagines that it has attained a level of civilization never
before achieved’.” (Max Weber, The Protestant Ethic and the Spirit of
Capitalism, trans. Talcott Parsons. New York: Charles Scribner’s Sons, 1958,
p.181-182)
Authority – Traditional, Charismatic, Rational-Legal
Weber identifies three types of legitimate authority – Traditional,
Charismatic, and Rational-Legal. The latter is distinctively modern, a product of
rationalization. It is based on legality, impersonal rules, and formal
procedures, rather than inherited status or personal flair.
In capitalist terms, a family business passed down generation to generation, or
an entrepreneur like Henry Ford who founds and runs his own company, would
respectively embody traditional and charismatic authority. A manager
with business school credentials, hired to run a bureaucratic corporation and
maximize shareholder value, would exemplify rational-legal authority.
Bureaucracy
The dominant mode of organization in the modern world is bureaucracy. This goes
for business corporations, institutions like hospitals and universities, and
government civil service. Bureaucracy is characterized by:
* Formalism – written rules, fixed procedures, everything handled uniformly
* Impersonality – calculable rules without regard to individual circumstance,
dehumanized without love or any emotional element
* Predictability – stable and dependable regulations and outcomes
* Knowledge – dependence on experts with specialized training
The strength of bureaucracy is its efficiency, making it an indispensable feature
of modern society. It’s weakness is how it contributes to “the iron cage.”
The Iron Cage
Weber uses this concept to refer to the coercive aspect of life in the modern
rationalized world, governed by impersonal forces such as the capitalist
imperative to make a profit, the rigid labour discipline of the assembly-line, and
bureaucratic structures that regulate our lives and treat us impersonally rather than
as individuals.
Formal vs. Substantive Rationality
This is a key distinction for Weber, because these forms of rationality come into
conflict. For example, modern capitalism is formally rational to the extent it is
based on systematic planning and economic calculation to make a profit,
while substantive rationality involves ethical criteria such as the well-being
of workers, customers, and society.
Likewise, bureaucracy is most formally rational when it operates based on
objective considerations in an impersonal, machine-like manner. But this renders it
dehumanized and heartless from the viewpoint of a substantive rationality that
values individuality, sympathy, and respect for persons.
Socialism vs. Capitalism
Marx thought that workers could achieve liberation by overthrowing capitalists and
taking over the means of production. Weber, writing several decades later, argued
(rightly it turned out) that this would just replace corporate bureaucracy with
government bureaucracy, combining them into a single hierarchy with
the dictatorship of the official. Capitalism, for all its faults, at least leaves room
for the dynamism of the entrepreneur.
Weber Videos
The above notes are the briefest possible sketch of Weber’s core ideas. For a fuller
explanation, read the Edward’s Royce excerpt in the next section. For an oral and
visual introduction to Weber, watch the videos below:
“Sociology: Max Weber” (The School of Life, YouTube, 7:22
min.) https://www.youtube.com/watch?v=ICppFQ6Tabw
“Iron Cage” (Sociological Dictionary, YouTube, 10:41
min.) https://www.youtube.com/watch?v=KKgHSY3Yy3A
12.2.1 “Max Weber” – Edward Royce
MAX WEBER (from Edward Royce, Classical Social Theory and Modern
Society. Lanham: Rowman & Littlefield, 2015, p.91-93, 96-98, 101-15, 149-57,
264-67)
For Weber, the process of modernization is essentially a process of
“rationalization.” The defining characteristics of the modern age emerge from this
rationalizing process: the “immense cosmos” of the capitalist economic system, an
impersonal and pervasive bureaucratic apparatus, … and a new “type of human
being,” the modern vocational person.
THE RATIONALIZATION THEME (p.92-93)
Rationalization, Gianfranco Poggi states, is for Weber “the master process of
modernity.” But precisely what this process entails is difficult to pin down. Weber
admits as much, warning that rationalization has “many possible meanings,” occurs
in “various departments of life,” and “covers a whole world of different things.” In
the western world, for example, Weber finds a unique rationalism not only in the
capitalist economic system, but also in the domains of science, music, architecture,
higher education, government administration, and law. …
The meaning of rationalization varies according to the form it takes and the social
sphere in which it is found, so no single definition will suffice. At the risk of
simplification, however, it might serve as a useful starting point to think of the
process of rationalization as involving some kind of systematic ordering. …
Social practices and institutional processes, including everything from meditation
rituals to job training programs to the operation of government agencies, are
rationalized to the extent they are systematically ordered by the implementation
of explicit rules and standardized procedures. We see a similar systematic
ordering and a corresponding pattern of uniformity throughout the modern
rationalized or, what George Ritzer calls “McDonaldized,” service economy – in
fast food restaurants, shopping malls, movie theaters, and motels, and in the
provision of education, health care, and entertainment. Wherever we might look, in
fact – in the workplace, the classroom, the prison, the hospital, the military – the
imprint of rationalization is visible in the presence of orderly and predictable
routines. The process of rationalization, touching virtually every area of social life,
is a systematizing and organizing force.
MODERN RATIONAL CAPITALISM (p.96-98)
The modern world is a capitalist world, but more fundamentally it is the product of
a multifarious and far-reaching process of rationalization. … When Weber turns
his attention to the origins, dynamics, and implications of the modern economic
order, his primary object of analysis is not capitalism per se, but rational
capitalism.
By referring to capitalism as “rational,” Weber does not mean to imply “moral
approval.” His usage is intended to be descriptive, not evaluative. Modern
capitalism, he maintains, is “formally” rational, but not
necessarily “substantively” rational. To say that capitalism, or any other social
phenomenon, is rational in a substantive sense is to judge it as commendable,
consistent with certain ethical notions. Formal rationality, by contrast, is a valueneutral designation. Modern capitalism is rational in this formal sense – this is
Weber’s key point – to the extent that business operations are conducted according
to systematic planning based on economic calculation and monetary
accounting. … The expression “nothing personal, it’s just business” alludes to
this type of formal rationality, while at the same time alerting us to the potential
divergence between formal rationality and substantive rationality, between what is
rational from a bottom-line accounting perspective and what is rational from an
ethical perspective.
Capitalism: Modern and Pre-Modern
Capitalism, understood as the pursuit of profit, is neither a uniquely modern nor a
uniquely western phenomenon, according to Weber, but what he calls “rational
capitalism” is both uniquely modern and uniquely western. He underlines the
distinctiveness of modern rational capitalism by contrasting it with the many other
“species” of capitalist profit making that have existed around the world for
“thousands of years.” He cites, among other types, “politically-oriented capitalism,”
“adventure capitalism,” “pariah-capitalism,” and “robber capitalism.” What he has
in mind here are early forms of capitalism where profit is made by speculating in
foreign trade ventures; or by taking advantage of opportunities opened up by
colonial expansion; or by lending money; or by financing wars, bribing politicians,
and otherwise exploiting fortuitous political developments. These forms of
capitalism, Weber observes, have an “irrational and speculative character,”
with profit derived less from ongoing market operations than from opportunistic
investments and the forcible acquisition of “booty.”
Modern rational capitalism is quite different, though not easily captured by a simple
definition. Weber insists on one point at the outset, however, namely that modern
rational capitalism cannot be equated with the “acquisitive drive,” or the “unlimited
greed for gain,” or the “pursuit of selfish interests by the making of money.” A
ruthless orientation toward accumulation, he observes, is present in human history
nearly everywhere and at all times. …
Modern capitalism, according to Weber, is an economic system where the provision
of human needs is satisfied through the continuous operation of privately
owned and profit-minded business firms. These capitalist enterprises are
distinguished by their reliance on a legally free labor force, their resolute
orientation toward market opportunities, and a mode of operation governed by
monetary calculation. … What distinguishes the modern economic system
accordingly, Weber asserts, is the rational pursuit of profit, “and
forever renewed profit,” by means of “rigorous calculation, directed with foresight
and caution toward” long-run economic success.
THE PROTESTANT ETHIC AND THE SPIRIT OF CAPITALISM (p.101-108)
The Protestant Ethic was originally published as a two-part article in 1905, and
then republished in a revised edition in 1920. This book touches on a number of
themes central to Weber’s work as a whole: the transition from traditional to
modern society, the origins of modern capitalism, the unique qualities of western
rationalism, the role of ideas in history, the influence of religious ethics on
economic conduct, the characteristics and fate of the modern individual, and the
prospects for individual freedom in the modern rationalized world.
Weber’s premise is that modern capitalism, at least in the early “heroic” stage of its
development, is characterized by a particular culture or “spirit.” To explain the
origins of this spirit is his primary objective. The central argument of
the Protestant Ethic, sometimes referred to as the “Weber thesis,” is that the
spirit of capitalism, as well as the type of person embodying this spirit, can be
traced back to certain religious influences originating from the Reformation. …
Weber’s ultimate purpose, as he modestly puts it, is to demonstrate that
the modern vocational culture, with its affirmation of the ideal of diligent labor in
a specialized calling, is “in some way religiously based.”
The Spirit of Capitalism
Weber derives a “provisional description” of the spirit of capitalism from the
writings of Benjamin Franklin. Among other everyday virtues, Franklin preaches
industry, prudence, frugality, honesty, and punctuality. He advises his readers to
save money, maintain creditworthiness, keep an “exact account” of income and
expenses, and avoid idleness and waste. He furthermore admonishes individuals to
accumulate wealth and earn “more and more money,” while at the same time
warning against frivolous spending and the “spontaneous enjoyment of life.”
Franklin’s wise old sayings, Weber states, illustrate the spirit of capitalism “in
almost classical purity.” …
Indeed, when Franklin set forth his moral precepts, the modern capitalist economic
system was still only on the horizon. The spirit of capitalism appeared prior to
the system of capitalism (in its modern form), and can conceivably be counted
therefore among the causal factors contributing to the development of that
capitalist economic system.
What Weber finds most interesting is that Franklin’s philosophy has the quality of
an ethos. … This ethic introduces something new into the culture: a morally
imbued attitude toward work and profit making. Where the spirit of capitalism
prevails, the lives of individuals revolve around and are made meaningful by the
faithful and methodical fulfillment of occupational or professional responsibilities.
Capitalists feel a devotion to their businesses, and workers feel a commitment to
their jobs. Labor, traditionally thought of as a necessary evil, is transformed into
“an absolute end in itself.” The spirit of capitalism thus sanctions an ascetic or
disciplined way of life, one systematically and purposely organized around the
performance of vocational duties. …
How did this peculiar spirit originate? How did it mange to overcome the “stubborn
resistance” of economic traditionalism and create a new type of “economic
man”? … The spirit of capitalism, he argues, “was born” from “the spirit of
Christian asceticism,” that is, from the Protestant ethic.
Ascetic Protestantism
With the Reformation of the sixteenth century, Protestantism broke from
Catholicism, creating a division within Christianity. The reform movement,
prompted by the writings of Martin Luther, put forward a new – “infinitely
burdensome and earnestly enforced” – set of commandments for living a devout
life. The faithful, it was now taught, can best serve god not by retreating into a
monastery or withdrawing into the church, but by attentively carrying out the
mundane obligations imposed upon them by their place in the world. Luther’s
concept of the “calling” (a “task set by God”) embodied this new principle: “the
valuation of the fulfillment of duty in worldly affairs as the highest form which the
moral activity of the individual could assume.” …
The revolutionary implications of the Reformation, Weber argues, and its
contribution to the development of economic rationalism, occur only with the rise of
ascetic Protestantism, particularly in the form of Calvinism. The central dogma of
Calvinism is the doctrine of predestination. According to this doctrine, the most
pressing issue in the lives of believers – whether they are among the saved or the
damned – is predetermined at the moment of creation by an omnipotent and
inscrutable god. In contrast to their Catholic counterparts, able to wash away their
sins in the confessional, faithful Calvinists can do nothing – no prayers, sacraments,
supplications, or offerings of any kind – to influence their fate. …
To help assuage anxiety, local pastors began instructing the faithful that they had
an “absolute duty” to consider themselves among the chosen and that the best way
to ward off doubt and exhibit the “certainty of grace” was through “intense worldly
activity,” meaning specifically hard work. …
For Calvinism, we are not put on earth to idle away our hours or have a good time
or even achieve salvation. Our sole reason for existence, rather, is to honor the
greater glory of god through the methodical and disciplined undertaking of our
worldly endeavors. If, however, individuals prove themselves successful in serving
god – if for example they run a profitable business – it would only be reasonable to
interpret this productivity as a sign of grace. Though not a logical derivation from
the Calvinist creed, this line of thinking, where economic achievement is taken to
be a sign of personal worthiness, was how the doctrine of predestination played
out in the everyday lives of the Protestant faithful. …
When the Protestant faithful enter the mundane world, they are obliged to work
strenuously, avoid leisurely pursuits and unnecessary pleasures, and make
constructive use of the limited time at their disposal. The Protestant ethic calls upon
believers to devote themselves to an occupation, work hard, and take advantage of
(god-given) opportunities. More to the point, however, what it demands is “restless,
continuous, systematic work” – “not labour in itself but rational labour in a
calling.”
The natural result of this virtuous performance of vocational demands is the
accumulation of wealth. This is highly commendable, perhaps even a sign of
salvation, but the use of such wealth for the enjoyment of life is morally
unacceptable. Idleness, relaxation, contemplation, and recreation, because they
detract from the fulfillment of vocational duties, are also sinful. Such superfluous
leisure activities are an impious waste of time – time better spend working to
glorify god. …
The spirit of capitalism, as interpreted by Weber, is a secular outgrowth of the
Protestant ethic.
From Ascetic Protestantism to Modern Capitalism
Protestantism favored the rise of capitalism by endowing profit making with an
“amazingly good” conscience. … Instead of being merely tolerated, moneymaking
became venerated, indeed a sign of moral worth. The combination of this “release
of acquisitive activity” … and the condemnation of luxury fueled the expansion of
capitalism by giving a powerful stimulus to savings and the “productive
investment of capital.” …
The Protestant ethic legitimized profit-making, but it also provided ideological
support to capitalism by justifying inequality … To the “bourgeois business man,”
it gave the “comforting assurance” that “the unequal distribution of the goods of
this world was a special dispensation of Divine Providence.” … By endowing
mundane business pursuits with the quality of a moral mission, moreover,
Puritanism made an ethical hero out of the “sober, middle-class, self-made
man.” Meanwhile, it provided that same bourgeois businessman with a reliable
labor force, a population of “sober, conscientious, and unusually industrious
workmen, who clung to their work as to a life purpose willed by God.” …
Ascetic Protestantism, Weber argues, promoted the development of the capitalist
way of life in two other respects as well. First, with its emphasis on the value of
specialized work and the importance of a “fixed calling,” it “provided ethical
justification of the modern specialized division of labour.” Second, the ascetic
condemnation of decorative ostentation, regarding clothing, for example, and its
call for “sober utility” contributed to the “powerful tendency toward uniformity of
life,” thus aiding “the capitalist interest in the standardization of production.” …
When “asceticism was carried out of monastic cells into everyday life,”
Weber says, “it did its part in building the tremendous cosmos of the modern
economic order.” But this outcome did not occur by design. The Protestant faithful
were preoccupied by one thing only: the “salvation of the soul.” Through their
religiously motivated conduct, however, they unintentionally called forth the
modern capitalist economic system. This result, Weber emphasizes, was entirely
“unforeseen” and “unwished-for.” Calvinism paved the way for the rise of modern

capitalism, but this was an unanticipated consequence of a purely religiously
inspired ethic of conduct.
The Rise of the Capitalist System
But once the modern capitalist system is up and running, Weber acknowledges, it
no longer requires the spiritual ethos that got it off the ground. … It assumes
rather the form of an objective, machine-like system, “an unalterable order of
things” to which individuals are compelled to adjust. The process of capitalist
rationalization, once it reaches a certain threshold, forces everyone to “follow
suit” or “go out of business.” While the “Puritan wanted to work in a calling,” under
the circumstances of present-day capitalism “we are forced to do so.”
THE RATIONALIZATION OF LEGITIMATE AUTHORITY (p.108-112)
Weber identifies three possible bases of legitimacy and, correspondingly, three
types of legitimate authority, with each of these taking a variety of forms. The
legitimacy of traditional authority derives from the sanctity of custom (“Obey me
because this is what our people have always done.”); the legitimacy
of charismatic authority rests on the extraordinary qualities of the leader (“Obey
me because I can transform your life.”); and the legitimacy of rational-legal
authority follows from the observance of formally established rules and procedures
(“Obey me because I am your lawfully appointed superior.”). These are ideal
types … Real-world systems of legitimate authority are more complicated, typically
taking a mixed form.
Traditional Authority
Originating from the rule of the father figure or master over his household,
traditional authority is the form of power exercised by the patriarch, the lord, the
prince, or the king. … The authority of traditional rulers stems from their occupancy
of customarily sanctioned positions of power. While traditional leaders encounter no
legal restraints on their authority, they do not possess unlimited discretion. They
too are “bound by tradition.” They risk their legitimacy, and may even provoke a
“traditionalist revolt,” if their commands fail to respect the time-honored ways of
the past.
Charismatic Authority
Charismatic authority … derives from the extraordinary qualities of the exceptional
individual. Examples include the religious prophet, the military hero, the great
orator, or more specifically a Gandhi or a Martin Luther King Jr. The authority of
charismatic leaders, their ability to inspire people to abandon their normal lives and
take up a historic cause, rests entirely on their own personal “gifts” or deeds: the
force of their example, the potency of their message, the righteousness of their
mission. …
In addition, while traditional authority is a conservative force, rooted in the past
and committed to the way things are, charismatic authority is a revolutionary force,
an enemy of the status quo. Charismatic figures typically appear during times of
hardship, crisis, and contention. They enter into the fray, rally converts, and
demand change, whether in the internal values and beliefs of followers or in the
external structure of the existing social order. …
Charismatic authority, because it originates from the qualities of persons and their
accomplishments, is intrinsically unstable and transitory. … The typical pattern,
Weber argues, is for charismatic authority to undergo a process of “routinization,”
gradually shedding its extraordinary qualities and giving way to either traditional
authority or rational-legal authority.
Rational-Legal Authority
Rational-legal authority, typically associated with bureaucratic organization, is the
specifically modern form of legitimate domination. This type of authority rests on
“legality,” on a “system of consciously made rational rules” – the rule of law
rather than persons. The commands issued by legal power holders are justified in
the name of impersonal rules enacted according to “formally correct procedure”
rather than “personal authority.” …
Among the most significant features of rational-legal authority is an administrative
staff organized in the form of a bureaucratic body with no particular personal
loyalty to ruling authorities. These bureaucratic officials are recruited on the basis
of technical qualifications, they operate within a fixed area of specialization, and
they are expected to fulfill their duties in an impartial and impersonal manner.
Along with the rule of law, the presence of bureaucratic administration, discussed
more fully below, is the primary source of the distinctive rationality characteristic of
legal authority.
Legitimate Authority, Modernity, and Rationalization
Weber does acknowledge two historically significant patterns, both relevant to his
diagnosis of the modern condition. First, just as traditional authority is the
preeminent form of domination throughout most of pre-modern history, so too is
rational-legal authority a uniquely modern phenomenon. …
Second, unlike traditional and rational-legal authority, charismatic authority is not
specific to any particular social context; it “has emerged in all places and in all
historical epochs.” Weber admits, however, that the rational-legal order
characteristic of modern society is less conducive to an “eruption of charisma” than
is the traditional social order.
BUREAUCRATIC RATIONALIZATION (p.112-115)
Bureaucracy, “the purest type of exercise of legal authority,” is the preeminent
mode of administration and organization in the modern western world. … The
process of modernization, for Weber, is a process of bureaucratization. Modern
society is fundamentally and inevitably a bureaucratic society. This is apparent in
nearly every domain of human association, including the army, religious
institutions, charitable organizations, interest groups, hospitals, and universities.
Even more important is the undeniable presence of bureaucratic administration in
the economic and political spheres, in the organization and operation of the two
central institutions of modern western society: the state and the capitalist business
enterprise.
Weber’s concept of bureaucracy is an ideal type, an abstraction constructed to
underline the rational properties of bureaucratic administration and highlight the
contrast between bureaucratic rule and traditional rule. … Along with the factory,
he states, bureaucracy is the “modern form of organization” that most
determines “the character of the present age and of the foreseeable future.” In
what follows, I provide an overview of Weber’s ideal-type representation of
bureaucratic administration. …
Formalism. Bureaucracy exhibits a high level of formalism insofar as official
business is conducted on the basis of written rules, administrative regulations, and
fixed procedures. … The rational formalism of bureaucracy requires that
administrative actions be handled in a uniform fashion – by the book – not on an
individual, case-by-case basis and not according to the personal predilections of
bureaucratic officials.
Impersonality. The formalism of bureaucracy is evident also in its impersonality.
Bureaucratic officials … perform their functions in a purely objective and matter-offact manner, in accordance with “calculable rules” and “without regard to
personal considerations.” Indeed, Weber argues, the more fully developed the
bureaucracy, “the more it is ‘dehumanized,’ the more completely it succeeds
in eliminating from official business love, hatred, and all purely personal,
irrational, and emotional elements which escape calculation.” …
Predictability. Formalism and impersonality ensure that organizational behavior
under bureaucratic auspices is optimally predictable. … This calculability is
particularly important in the relationship between the modern bureaucratic state
and the capitalist business enterprise. … The capitalist market economy depends
on the existence of a stable and predictable governing system, and this is
precisely what bureaucratic administration offers.
Knowledge.. The process of bureaucratization gives rise to a social order
characterized by “the ever-increasing importance of experts and specialized
knowledge” and by an “absolute and complete dependence” on a “specially
trained organization of officials.” This development alters the structure of social
power. Bureaucratic administration, Weber states, “means
fundamentally domination through knowledge.”As society is bureaucratized, the
technical specialists employed in bureaucratic offices come to comprise a new
“privileged stratum,” one distinguished by their educational qualifications. …
They not only have the requisite knowledge, but as bureaucratic insiders they
also know the ropes and they know how to get things done. This circumstance
means that the “political ‘master,” the person standing at the head of the
bureaucracy, “always finds himself, vis-à-vis the trained official, in the position of a
dilettante facing the expert.”
Efficiency. Bureaucratic organization is characterized by an office hierarchy
consisting of well-defined channels of authority and lines of supervision … In a fully
developed bureaucracy, the process of administration, carried out on the basis of
expert knowledge and impersonal rules, is notable for its continuity, stability,
reliability, and consistency. … It is the most efficient and “most rational known
means of exercising authority over human beings.”
Indispensability. Bureaucracy, the purest embodiment of formal rationality, is an
indispensable feature of modern society. … The very existence of modern society
depends on bureaucratic organization. Short of sacrificing the achievements of
modernity, there is no other way of running the state or the economy. Bureaucracy,
Weber argues, is “escape proof” and “practically indestructible.” …
The bureaucratization of the world, and the process of rationalization more
generally, is reflected in … the regulation and organization of social activities
according to formal rules and written procedures, the impersonality and
dehumanization of social relations, … the specialization of functions, the role of
training and education, the reliance on professionals and officials, the importance of
knowledge and expertise, and the overall level of efficiency in the management of
human beings and social processes.
THE IRON CAGE (p.149-157)
On several occasions Weber uses the expression “iron cage” or some equivalent to
characterize a particular feature of modern society or to warn of a possible future.
Though often cited in the secondary literature as the centerpiece of his diagnosis of
the modern condition, the precise meaning of this metaphor and what it is intended
to imply are not perfectly clear, and its usage also varies from one context to
another. To further muddy the waters, the primary referent of this concept appears
to shift from capitalism in Weber’s earlier writings to bureaucracy in his later
writings. …
Weber employs the concept of the iron cage to evoke the coercive
circumstances of life in the modern rationalized world. Though only
occasionally using the specific term, he frequently discusses how individuals are
constrained by the dominant institutions of modern society – forced to comply with
the dictates of formally rational procedures, the imperatives of the market
economy, the demands of the industrial workplace, and the regimentation of the
bureaucratic order.
Capitalism: The Most Fateful Force in Our Modern Life
The behavior of actors in the modern economy – employers and employees, as well
as bankers, shareholders, and mortgage holders, all of whom are locked in the
competitive struggle for existence – is determined not by personal motivations for
which they might be held ethically accountable, but by “impersonal forces.” And
for those who refuse to abide by these forces, the result is “extinction.” The
capitalist who fails to make a profit will be driven out of business …
Workers have little choice but to accede to the dictates of the property-owning
class. And once they hire themselves out to an employer, they are denied even the
“slightest freedom” in determining the conditions of their work. Upon entering the
capitalist workplace, they are subject to a rationalized “military discipline,” tied to
the rhythms fixed by a process of “scientific management,” and placed in the
service of the machinery of the modern factory which thoroughly dominates “their
everyday working life.”
Bureaucracy: A Structure of Domination
Bureaucracy, Weber argues, is the supreme instrument for the organization and
mobilization of collective action, but it is also a “structure of domination.” It is a
uniquely efficient system for managing the affairs of society, but it is also a potent
“means of exercising authority over human beings,” both those employed within the
bureaucratic machinery and those subject to it. Bureaucracy thus exhibits a dual
quality: it is technically indispensable and dangerously powerful. Because it
is such a formidable system of domination and prone to spread like a virus,
bureaucracy, Weber believes, is hazardous to both the autonomy of the individual
and the dynamism of society. …
The professional bureaucrat, he says, “is chained to his activity,” reduced to “a
small cog in a ceaselessly moving mechanism which prescribes to him an
essentially fixed route of march.” … But while he sometimes describes bureaucratic
functionaries as “little cogs,” at other times he envisions them forming
a privileged social stratum. As members of a professionally trained elite,
bureaucratic officials possess a “tremendous influence” … They not only enjoy a
“distinctly elevated social esteem vis-à-vis the governed,” but the dominant
position they derive from their unrivaled expertise within the system of
administration also puts at risk the freedom of those subject to their authority. …
The more the “spirit of bureaucracy” and the “civil-service mentality” prevail,
the less space there is for the cultivation of visionary politicians and risk-taking
entrepreneurs. … The ceding of power to the bureaucrat … tightens the bars of
the iron cage – stifling private enterprise, hardening the already “rigid casing” of
capitalism, and leaving the nation-state without vitality and direction.
Formal and Substantive Rationality
Distinguishing between two conflicting forms of rationality – formal and substantive
– Weber discloses an apparent paradox: the irrationality of the modern
rationalized world. … Where formal rationality prevails, social life is organized
through the application of established protocols, set procedures, and fixed
rules, making the workings of society more calculable and predictable. The second
promotes orderliness by submitting social practices to a value criterion …
These two forms of rationality, Weber believes, are typically at odds with each
other. … Weber employs this distinction to explore the moral ambiguity of the
modern condition. The formally rational quality of modern-day social institutions, he
argues, engenders numerous substantive irrationalities, as the following examples
illustrate.
The Capitalist Business Enterprise. Business operations, focused on the
monetary bottom line and free of any ethical infringements, are guided solely by
market opportunities. This exemplifies the antagonism between formal rationality,
oriented toward the calculable goal of continuous profitability, and substantive
rationality, oriented toward specific ultimate ends. “The more the world of the
modern capitalist economy follows its own immanent laws,” Weber asserts,
reflecting on this conflict of principles, “the less accessible it is to any imaginable
relationship with a religious ethic of brotherliness.” More generally, what we
observe is an irresolvable tension between the rational, profit-minded functioning of
the capitalist economic system and commonly held normative, religious, and
political values. …
The Industrial Workplace. For Weber, as we have already seen, the rationality of
capitalism requires a rigidly organized labor process where workers are compelled
to obey the commands of the capitalist. This state of affairs, he recognizes, is an
insult to common human notions of decency. “The fact that the maximum of formal
rationality in capitalist accounting is possible only when the workers are subjected
to domination by entrepreneurs is,” Weber asserts, “a further specific element of
the substantive irrationality in the modern economic order.”
Bureaucratic Administration. Bureaucratic administration achieves the highest
degree of formal rationality where officials conduct their business “according to
purely objective considerations” and “without regard for persons.” A rational
bureaucratic organization functions with the efficiency and impersonality of a
machine, with people processed according to “calculable rules,” regardless of
their personal needs or individual circumstances. “Bureaucracy develops the
more perfectly, the more it is ‘dehumanized,’” Weber says … This formally
rational quality of bureaucratic administration – the cause of its often being
disparaged as heartless – is precisely what makes it substantively irrational. …
As the process of rationalization plays out in the capitalist business enterprise, the
free market, the industrial factory, the bureaucratic organization, the legal system,
and other institutional realms, social relationships become increasingly divorced
from ethical considerations. The rationalized world is one in which people, who
from a moral outlook might be conceived as unique individuals deserving
kindness, sympathy, and respect, are treated instead in an impersonal,
objective, and matter-of-fact manner – as cases in a courtroom, clients in a
bureaucracy, competitors in a market, or employees in a workplace.
Formal rationality is a systematizing and regulative force, making the world
more calculable, orderly, and predictable, but at the same time it is an ethically
irrational force, undermining the motivating power of value-laden religious
beliefs, moral ideals, and political principles. The presence of this contradiction is,
for Weber, the price we pay for living in a modern society.
THE DICTATORSHIP OF THE OFFICIAL (p.264-267)
Against Socialism
Weber argues, indeed, that the central promise of socialism – to put “an end to all
rule by man over man” – is a utopian illusion, under no circumstances attainable. If
anything, he claims, the substitution of a socialist planned economy for a capitalist
market economy would result in an even more oppressive system of domination.
Modern society is inevitably a bureaucratic society. Neither the modern state
nor modern industry can be effectively managed in the absence of bureaucratic
administration. … But if left uncontrolled, the process of bureaucratization
can jeopardize political and economic dynamism and can pose a
serious threat to individual freedom. This is precisely the problem Weber
anticipates with socialism. A planned economy, he predicts, would dangerously
exacerbate the tendency toward bureaucratic domination that is already evident
under capitalism.
In a capitalist society, the bureaucracies of business and government exist side by
side, “as separate entities.” This has the advantage of enabling each to curb the
power of the other. But under socialism, the “private and public bureaucracies …
would be merged into a single hierarchy,” a “single body with identical interests,”
no longer subject to any counterbalancing control. …
This is Weber’s main concern about socialism. By fusing economic and political
authority, it would establish one system of power, with no countervailing force. If
private ownership and the entrepreneurial class were eliminated, Weber warns, the
“state bureaucracy would rule alone.” State officials would be elevated to
unchallenged leadership in a single bureaucratic structure. … The ultimate result,
Weber famously declares, would be “the dictatorship of the official, not that of
the worker.” …
Economic planning would also intensify the existing trend toward “the everincreasing importance of experts and specialized knowledge.” Socialism is
advertised as a system intended to liberate the working class. In reality, Weber
asserts, it would lead to the empowerment of bureaucratic officials and
technical specialists, and it would result in the replacement of one structure
of domination by another – capitalist domination by bureaucratic domination.
For Capitalism
Weber was anything but a cheerleader for capitalism, but he vehemently defended
the system against both its reactionary critics on the right and its socialist critics on
the left. His position in these polemics, as Guenther Ross explains, was not so much
pro-capitalist as it was “anti-anticapitalist.” … Beyond this, however, he did
believe that a capitalist market economy had certain virtues that were lacking in a
socialist planned economy.
The system of modern capitalism, Weber emphasizes, exhibits a high degree of
“formal rationality.” … As Weber recognizes, however, the “formal rationality of
monetary accounting” is indifferent to all “substantive” norms. For example, the
system of rational capitalism, driven by the goal of profit maximization, does not
yield a society where there is an equitable distribution of rewards … However,
Weber points out, capitalism does … deliver the goods, it does have the virtue of
providing for the basic economic needs of the population. …
Capitalism has something else going for it as well, according to Weber. It’s a
uniquely efficient way of organizing the provision of goods and services. This
advantage derives from its characteristic as a profit-oriented, competitive market
system where the allocation of resources is based on monetary calculations of
prices and profitability. Money, he says, “is the most ‘perfect’ means of economic
calculation,” the most “rational means of orienting economic activity” – for
example, informing investment and consumption decisions. …
In agreement with Marx, Weber sees capitalism as a revolutionary system, always
changing, expanding, and growing. This is what he seems to most admire about the
capitalist economy – its unique dynamism, energy, and innovative power. He
attributes these qualities to the risk-taking entrepreneur and the rough-and-tumble
of market competition. The entrepreneur, for Weber, is the embodiment of a
spirited individualism. Analogous to charismatic politicians in the political arena, the
entrepreneurial class is a creative power and a counterbalancing force to the
stifling effects of bureaucratization. …
The “moving spirit” of the entrepreneur and the give-and-take of market
competition – these two capitalist institutions, he hopes, can help preserve some
remnant of individual freedom in the modern bureaucratized world. This appears
to be Weber’s main reason for supporting capitalism over socialism.
12.2.2 Lessons from Weber – Five Cases
Why study Weber in a business ethics context? First, the concept of rationalization
opens our eyes to how various developments share a common theme – from the
industrial assembly line to the McDonaldization of restaurant service, and from
business management practices to bureaucratic government.
Thus, James Burnham’s The Managerial Revolution (1941) argued in the spirit of
Weber, that Soviet Communism and American Capitalism were evolving similar
managerial structures. Marx dreamed of the workers taking power from a class of
individual proprietors, but the Russian Revolution merely replaced the old order
with a new class of administrators. Meanwhile, bureaucratic managers were
becoming central to capitalism.
Second, once aware of the rationalization process, we can consider whether it’s
always a good thing, or if we should leave more space for individual spontaneity,
independent judgment, and treating others as unique persons. Weber’s
ideas are a useful corrective, because often ethical problems in business lead to a
response of “more rationalization.”
When w hear about ethics failures in the treatment of employees or consumers,
often the first response is “more laws and more regulations,” with the hope that
business can be forced to be good. Sadly, a law intended to prevent Abuse
A often has unintended consequences B and C, leading to inefficiencies. Those
determined to get away with Abuse A then find clever ways to work around the
law or evade its purpose.
(1) Appearance-Based Discrimination
A question for Assignment 3 asks: “To what extent should we try to ban
appearance-based-discrimination?” Such a question can be approached at two
levels. Many focus on whether such discrimination is morally wrong, and when
exceptions should be made for certain business concepts.
At another level, we must consider the probable effects of attempts to ban it, and
whether they would led to disutility that outweighs any good achieved. This goes
especially given that beauty is partly subjective, subject to cosmetic alteration, and
the beautiful may be both favoured and disfavoured in different contexts.
As can be seen from other human resource issues, such laws typically lead to more
bureaucracy, more litigation, and more procedures and training designed to cover
the company’s ass.
(2) Workplace Romance to Dating Apps
According to a 2019 study, just 1 in 10 couples report meeting their partner at
work, down from almost 1 in 5 in 1990, as workplace relationships have “become
less socially acceptable” (Francesca Specter, “Just One in 10 Couples now Meet
at Work,” Yahoo, July 23, 2019). This three-decade period corresponds roughly
with the campaign against sexual harassment in corporate and professional
settings.
Genuine sexual harassment is a cancer in the workplace, but since the concept is
blurry, it’s hard to simply “excise” it without damaging surrounding tissue. As
Elsesser argues (Unit 10.9), people wanting to play it safe may limit interactions
with the opposite sex, reinforcing the sex partition. Dating between people of
unequal rank becomes problematic – it can lead to accusations of sexual
favouritism, or quid pro quo reprisal if things go sour. Employers want to
avoid legal liability, and find it easiest to discourage any form of office romance.
This furthers the rationalization process, as it seeks to eliminate “love, hatred,
and all purely personal, irrational, and emotional elements” from the workplace.
Business is business, not a place for real personal relationships or meeting a
potential mate. Romance gets rationalized too, with dating apps now far and away
the most common way of finding a partner. Rather than meeting up in the context
of learning (school), having fun (bars), or working together, dating has its own
dedicated, separate technology. Couples match via computer app, with profiles the
equivalent of resumes when we apply for jobs. Some find this alienating
We can debate whether this social shift is good or bad overall. The point is
that regulations, designed to abolish certain evils, may contribute
to rationalization in ways that aren’t fully intended or purely positive.
(3) Loan Officer
The following case involves a different sort of rationalization, done not to enforce
good behaviour, but in the name of efficiency and quantification.
“[Mid-20th century] mortgages were issued through the efforts of a traditional loan
officer. This was a mid-skilled, middle-class worker, charged with exercising
independent judgment about the economic wherewithal and reliability of
particular borrowers and the value of particular houses … The traditional loan
officer based his judgment not just on brute facts (a borrower’s taxable income, a
home loan-to-value ratio) but also on a broader situation sense concerning
the borrower’s character and standing in the community.
Traditional loan officers exercised genuine discretion and carried substantial
responsibility. … Even debt-payment-to-income ratios were discussed in terms of
what was “normal” and “appropriate,” including after “special consideration.” Loan
officers could apply such guidelines only after getting to know their borrowers. For
example, at Marquette Savings Bank in Erie, Pennsylvania … a loan officer,
accompanied by one of the bank’s trustees, personally visited each loan
applicant …
Home mortgage finance operates in a profoundly different fashion today. … Banks
have sharply reduced the number of home mortgage officers required to process a
given volume of loans, and the loan officers who remain have been … deskilled.
Loan officers today do little more than help potential buyers gather information and
fill in forms: they are less professional bankers than collectors of machine-scorable
data.” (Daniel Markovits, The Meritocracy Trap. New York: Penguin Press, 2019,
p.165-166)
How does this exemplify rationalization?
* exercise of judgment is replaced by applying uniform criteria.
* borrowers are evaluated based on brute facts, not personal factors.
* formal standards set by higher-ups, while low-level jobs deskilled.
What are the costs and benefits of rationalization?
* customer loses personal touch (i.e. chance to be evaluated by someone who
knows them as an individual and can make exceptions) – but avoids risk of being
turned down for a loan because someone doesn’t like their face, clothes, etc.
* loan officer’s job becomes more routine, less interesting, less needed.
* bank gains in efficiency, can process more loans in less time, and relies more on
top bankers who run the system than the judgment of many branch employees.
Such rationalization makes sense if it leads to better outcomes (i.e. more profit,
because loan repayment rates and customer satisfaction remain about the same
while time is saved approving loans). Unfortunately, organizations often
push rationalization as an end in itself, because top managers like to retain
power and micro-manage decisions, or they are obsessed with uniform procedure.
Such formal rationality can be substantively irrational, if it makes employees and
customers feel like cogs in a machine, with no ability to use judgment to handle
non-standard cases.
CBSA Cases: One of my relatives worked for the Canada Border Services
Agency (formerly Canada Customs), who are responsible for collecting customs
duties on goods brought or mailed into Canada. Below are two cases that came up
in the 2000’s. They give us a chance to explore rationalization in a civil
service context.
(4) Overriding Tax Collection Rules
For goods mailed into Canada, $20.00 is set as the minimum value at which taxes
and duties are to be collected. However, the manager at a Canada Customs Postal
operation noticed a shortfall in revenue due to the cost of collecting duties and
taxes, about $10.00 per item. Since the GST was 5%, the minimum amount
collected on the minimum value was only $1.00. So the government was losing
money in collecting the revenue! The minimum value for taxes had to be raised to
$200.00 when only GST was owed, just to break even.
In order to fix this policy, the manager instructed inspectors to release all goods
when duties and taxes to be collected were under $10.00. Since this instruction
contravened the rule setting the minimum value for taxes at $20.00, the union
baulked and asked the manager for written instructions. They didn’t want to be
blamed for breaking a rule, and liked how collecting more taxes led to more hours
worked and overtime pay.
The manager did not have the authority to put the instructions in writing. But he
found a more general directive that required all government employees to use
government monies wisely. By appealing to this principle, the manager
justified overriding the more specific rule. He thus prevented formal
rationality (apply uniform procedures) from leading to substantive
irrationality (spending more on billing than was being collected in revenue).
My relative regards the manager as a hero for using his own judgment to save
taxpayer money, and notes that he went on to receive many promotions. He dared
to go against the spirit of bureaucracy, which is to put rule-following and uniformity
first. It’s possible that the directive to “use government money wisely” wasn’t
intended to override rules about tax collection, but the “collect taxes on items
worth $20.00” rule also wasn’t intended to cost the government money. It dated
from decades earlier when collection costs were lower.
(5) Workplace Safety and Exceptions
Most people would consider it progressive for employers to enforce safety standards
and cover the cost of safety boots. But what if this harms individual workers?
The Canada Customs union had a long-standing demand that management should
provide footwear for inspectors as part of their uniform. Eventually, management
and the union agreed that protective footwear should be required on the job and
paid for by management. As a result, a one-size fits all approach was taken, and
every inspector was provided with a rigid, high-top boot that had a steel cap and
puncture-resistant steel plate in the sole.
The footwear was intended to protect the inspectors, but the inflexibility of the
safety boots caused injury to some people’s tendons via repetitive stress.
Management paid for orthotic inserts, but this failed to resolve the problem, which
was severe enough that my relative and others had to take sick days.
Since management and the union had agreed on the footwear which was
mandatory, it was left for individuals to seek exceptions via doctor’s notes. These
were used to set precedents. The result, after several years, was that inspectors
gained a certain latitude in the choice of protective footwear based on their
preferences, needs, and conditions of work.
This case shows how the formally rational pursuit of uniform requirements in
safety wear leads to pain for particular individuals. They must expend a lot of effort
to carve out exceptions to a rule that is substantively irrational when applied in a
one-size-fits-all manner. You might compare this case to workplace vaccine
mandates (except if you drop a heavy parcel and crush your toes, the injury is not
contagious).
Weber Questions
1a. Describe one idea from Weber that you find especially compelling, and one that
puzzles or doesn’t convince you.
1b. What lessons about rule-making and rationalization can be drawn from the five
cases in 12.2.2?
12.3 Leaner & Meaner
“Lean and Meaner” refers to a trend in North American business in the 1980’s and
90’s whereby – in the name of being more competitive, efficient, or profitable for
shareholders – companies downsized workers and middle managers, outsourced
manufacturing jobs to low-wage countries (leaner), and employees were treated
more harshly with evaluation policies like “rank and yank” (meaner).
Why did this Occur?
After being the dominant industrial economy left standing after World War II, North
American business in the 70’s faced stiff competition from Japan, West Germany,
etc. By the 1980’s Communism and socialist economics more generally were losing
power as ideals. 1979-80 saw the election of Margaret Thatcher (UK) and Ronald
Reagan (US), both strongly free-market. 1989-91 saw the collapse of the Soviet
Union and fall of Communism in Eastern Europe. While these liberal democratic
developments were highly positive, it also meant that there was no real
alternative to “keep capitalism honest” – to make business feel that it needed to
offer a decent deal to the average worker.
Outline
The first two sections are case studies of classic companies – 12.3.1 “Safeway:
Reinventing Management” and 12.3.2 “Jack Welch & the Fall of General
Electric.” Business ethics textbooks sometimes give the impression that Friedman’s
Stockholder theory is the older approach which gradually gave way to a kinder
Stakeholder approach. But the examples of Safeway and GE suggest that opposite that mid-20th century these firms were more stakeholder oriented, but turned
more Friedmanite after 1980. Thus, the Stakeholder theory of Freeman and
Solomon (Unit 5) is better seen as a response to these trends, not a description
of prevailing business behaviour.
The final three sections deal with business ethics issues that rose to prominence in
this era – 12.3.3 “Are CEOs Overpaid?,” 12.3.4 “The Ethics of Corporate
Downsizing,” and 12.3.5 “Rank and Yank.” The topic of CEO pay revisits the
subject of distributive justice (Unit 4). Downsizing and rank and yank, while
intended to maximize profit, may exemplify the profit-seeking paradox (Unit 5),
when squeezing workers too hard has unintended consequences.
12.3.1 Safeway: Reinventing Management
The excerpt below is from a book that documents how since the 1970’s, a wider
economic divide has opened in the US between a highly credentialed and
overworked elite class (financiers, managers, lawyers, doctors), and the middle
class who have been left behind. It uses the example of the Safeway grocery chain
to argue that changes in finance and management moved American corporations to
a more stockholder orientation than was the case at midcentury (1940-1970).
Daniel Markovits – Reinventing Management
(From The Meritocracy Trap. New York: Penguin Press, 2019, p.240-43, 245-47.
“The Safeway supermarket chain was founded by the son of a Baptist minister, who
promoted cash-and-carry grocery stores … For decades – through expansions,
contractions and restructurings – Safeway did business under mottos such as “Drive
the Safeway; But the Safeway” and “Safeway Offers Security.”
Throughout this period, the firm functioned on the midcentury model, embracing
what Fortune magazine, in a 1940 article … called “a simple formula for
success: it behaves as if it were operated for the benefit of its producers,
employees, and customers” [i.e. stakeholder theory before the term was
coined]. The formula, moreover, was no empty slogan. The firm’s 1939, 1940, and
1941 annual reports, for example, all proudly announced that although each year
saw a decline in the number of Safeway stores in operation, this had not required
the company to fire any of its employees. … In 1972, it was ranked first among
food retailers for “social responsiveness and accountability to the public
interest.” …
Safeway’s top managers, in this period, retained close connections to the rest of
the firm. In 1965 annual report, in celebrating the company’s fortieth anniversary,
proudly announced that Safeway’s president had worked for the firm for all forty
years, beginning as a part-time food clerk when Safeway was incorporated in
1926 … Safeway’s policies enabled and even encouraged this trajectory: “We live
and preach people development” the company announced: “we systematically
forecast needs for trained and experienced managers; we identify them and provide
the training … and we create opportunities for them to move up.” …
Safeway’s payroll was distributed broadly across its workers: a division manager
might, with bonuses, take home half the pay of the CEO. And Safeway’s CEOs were
paid well but not exorbitantly; in each year between 1956 and 1964, Safeway paid
its CEO Robert Magowan, $135,000, which amounts to roughly $1.2 million in 2018
dollars. …
Beginning the late 1970’s and accelerating through the 1980’s, a series
of interlocking innovations – in finance, in law, and in management itself
remade the American corporation and launched a new style of management:
meritocratic rather than democratic, and with income intensely concentrated at the
very top.
First, companies changed how they fund their businesses. Midcentury
firms invested the lion’s share of their profits in their own activities, rather
than returning them to shareholders or creditors…. Publicly traded firms today
retain only a small share of their earnings, and fund less than a quarter of major
new expenditures from past profits. …
Top managers lost the discretion that a large stock and steady flow of retained
earnings supports and faced new pressures to promote their firms’ bottom lines,
including in particular by squeezing payrolls for everyone below them. Where the
midcentury firm’s insulation from the capital markets had been so effective that
“separation of ownership and control” became the organizing ideal of
midcentury management, the contemporary firm’s capital structure makes
management intensely accountable to activist investors.
Second, new legal technologies created the market for corporate control that
takeover artists might deploy – routinely rather than just in exceptional cases to discipline management that failed to maximize shareholder value. The
discipline came through many mechanisms, including perhaps most importantly
the leveraged buyout – an arrangement whereby an acquirer seeking to take over
a firm uses the target firm’s own assets to secure a loan to buy the target’s shares.
Beginning in the 1980s, leveraged buyouts acutely increased the pressure that
potential takeovers placed on incumbent managers. …
Third, these financial and legal innovations spurred management innovations,
through which firms displaced the democratic management technology deployed at
midcentury …
Today, 25 percent of top business school graduates join elite consulting firms …
The talent that flooded management consulting took relentless aim at middle
managers, openly seeking to “foment a stratification within companies” …
MIT’s Sloan School of Management … developed a process called corporate
“reengineering,” which aspired to “break an organization down into its component
parts and then put some of them together again to create a new machine.”The
remaining parts, left out of the new machine, typically consisted of middle
management. … McKinsey, for its part, championed “Overhead Value
Analysis” … “Since overhead expenses are typically 70% to 85% people-oriented
and most savings come from work-force reductions … cutting overhead does
demand some wrenching decisions.” …
Safeway, as it happens, exemplifies these recent developments in management
also. The form’s character changed dramatically in 1986 when, despite a sharply
rising stock price, rising dividends, and record earnings, it succumbed to a
leveraged buyout. Safeway’s new corporate statement of purpose, advertised in the
lobby of its headquarters, displaced the old mottos in favor of a promise that
Safeway would pursue: “Targeted Returns on Corporate Investment.”
Divisions of the firm were shuttered, closing stores (often in struggling
communities) and costing jobs. When the entire Dallas division was closed, nearly
nine thousand employees (with an average tenure of seventeen years) were fired.
The form’s middle management was sharply depleted – Safeway fired many
admittedly “very good” employees from its corporate headquarters and eventually
paid out millions of dollars to settle wrongful termination suits.
The management came increasingly from outside the firm. Safeway’s current CEO
is trained as a certified public accountant and got his job on account of running a
competitor that acquired Safeway through a merger … In 2014, Safeway’s CEO
received $8,982,429 in total compensation, nearly ten times what his predecessor
in the 1960s was paid.”
12.3.2 Jack Welch & the Fall of General Electric
Jack Welch, CEO of General Electric from 1981-2001, was the most influential
corporate leader and management guru of his time. Admired by Wall Street, the
business press, and even management schools, Welch set the trend
for downsizing employees, outsourcing jobs, rank and yank evaluations,
prioritizing quarterly earnings over long-term planning, and exorbitant
CEO pay and perks.
In the short-term and median-term, Welch’s policies seemed to pay off, and he was
hailed as “manager of the century” by Fortune magazine just before he retired
with a $417 million severance package. But long-term, they led to the decline
and unravelling of GE. After his death in 2020, assessments of his legacy were far
more negative, such as “The Man Who Broke Capitalism: How Jack Welch
Gutted the Heartland and Crushed the Soul of Corporate America” (2022)
by New York Times business reporter David Gelles.
The selections below explore the cautionary tale of Welch and GE as it unfolded,
from multiple angles.
Neutron Jack: Manager of the Century
Alejo Jose G. Sison – Neutralizing “Neutron Jack”
(From Honest Work, ed. Joanne B. Ciulla, Clancy Martin, Robert C. Solomon.
Oxford UP, 2007, p.564-568. Originally from The Moral Capital of Leaders: Why
Virtue Matters, 2003, p.129-138.)
“Jack Welsh joined General Electric (GE) in 1960, working as a junior chemical
engineer for its plastics division … In April 1981, he succeeded Reginald H. Jones
as the eighth chairman and CEO … GE traced its beginnings to the Edison Electric
Light Company, founded by Thomas A. Edison in 1878. … As of June 2002, GE was
the only company from the original Dow Jones Industrial Index of 1896 that still
existed. …
A roster of business writers … declared Welch to be “the world’s greatest
business leader,” “the manager of the century,” “the CEO of the century”;
or, as Fortune magazine would unabashedly say, “the most widely admired,
studied, and imitated CEO of his time.” …
In 1980, the year before Welch became chairman and CEO, GE reported 1.5 billion
in profits. From 1981, during Welch’s first five years at the helm, he fired one out
of four people working in the firm. This earned him the worthy moniker of
“Neutron Jack,” referring to his uncanny capability to get rid of people while
leaving the company’s physical plant intact. Throughout his 41-year career at GE,
20 of which were spent at the top office, he had downsized more than 100.000
employees. By the end of Welch’s watch in 2001, profits at the company had
grown to 14.1 billion.
For at least the past 20 years, share prices at GE had risen at an average rate of 21
percent each year. This record was about 50 percent faster than the Standard and
Poor’s 500 stock index … GE was Wall Street’s darling and constantly ranked first
in surveys among the world’s most admired and most respected
companies. How was Welch able to accomplish all this?
First among Welch’s recipes for success was the strategy that every GE product
should be “number 1, number 2 or abandoned.” Later on, Welch refined it after
he had learned that many of the company’s managers were defining their markets
so narrowly that practically all the products became number 1. …
No less important was the 20/70/10 people management philosophy that Welch
instilled in GE. The company went through an annual appraisal system in which
every manager was ranked in the top 20 percent, in the vital middle 70 percent, or
at the bottom 10 percent. … The bottom 10 percent got fired. The top 20
percent got a grade of A, meaning they both “made the numbers and embodied GE
values.” … Welch spent at least 60 percent of his time choosing, developing, and of
course, firing people. So committed was he to the task, that he personally
interviewed every single promising candidate for the top 500 positions at GE. …
Finally, Welch also proved to be a consummate master in the art of negotiating
deals. During his tenure, GE successfully made close to 1,000 acquisitions and
more than 400 divestments. …
He left the chief executive’s office in September 2001 bathed in an almost
supernatural aura. … Welch was often painted by hagiographers not only as a “selfmade man,” but also as a “rebel” or “revolutionary” who single-handedly
transformed stodgy GE into a lithe and nimble firm. … A few business analysts and
commentators, however, begged to disagree.
Contrary to the popular belief that Welch inherited a moribund company from
Reginald Jones in 1981, things were already sailing quite smoothly for GE even
then. Between 1972, when Jones began his stint at the top, and 1981, when he
handed the baton over to Welch, revenue had already been growing at an annual
rate of 12 percent, and earnings at 16 percent. In fact, the average annual earnings
growth throughout Welch’s tenure at 12 percent was even lower than Jones’s,
although it had reached about 15 percent in Welch’s last eight years. …
What Welch had really mastered was the fine art of having an extraordinarily
thriving relationship with Wall Street. Under Welch, GE gave Wall Street exactly
what it wanted, predictable increases in earnings, quarter by quarter, without any
surprises. …
Six month after Welch’s retirement from GE, serious questions began to emerge
regarding the veracity of the company’s numbers and the credibility of the
accomplishments of its former CEO. First to raise the red flag was Bill Gross, an
influential executive of Pacific Investment Management Co., the world’s largest
bond fund. … Whereas GE’s superb reputation rested on its industrial powerhouse,
with products ranging from light bulbs to aircraft engines, it had in fact become
a financial company, according to Gross. But unlike other financial firms, GE’s
risks were heavily disguised, Gross said.
Gross voiced a common fear that GE was actually ‘managing’ or ‘smoothing’ its
earnings, rather than reporting them faithfully, so as to keep up an impressive
record of profit growth. ‘Managing’ earning was one thing, but another more serious
charge was that GE was in fact covering up a slump in growth by claiming to earn
more money than it actually was …
By the end of the first semester of 2002, GE’s share price had fallen by 35 percent
since the beginning of the year, dropping about twice as much as the Standard &
Poor 500 index. A reassessment of Welch’s tenure at GE was definitely in order. …
[In March 2002, his second wife Jane Beasley] filed for a divorce. … The estranged
couple’s divorce papers revealed that … Welch would also continue to have – after
his retirement – full access to company services and facilities, including a Boeing
737 jet, a luxurious Manhattan apartment with its attendant costs, dining privileges
at exclusive restaurants and courtside seats to New York Knicks and US Open
games.
It is certainly hard to justify such a lavish outpouring of shareholder money on
someone who, like Welch, is already in retirement. Furthermore, the issue remains
of who should be paying taxes for such monies. In principle, Welch should be
paying and GE could write the corresponding amount off, but only if the company
could show that these are ordinary and necessary expenses of doing business.”
Updates & Unravelling
The Rise and Fall of General Electric (GE)
Sarah Hansen, Investopedia, accessed May 2022.
“In 2004, GE settled a U.S. Securities and Exchange Commission (SEC) probe that
concluded the company failed to properly disclose Welch’s retirement
benefits valued at $2.5 million annually, including the free use of a corporate jet
and a multi-million dollar New York City residence.
In 2009, GE paid a $50 million penalty to settle a wide-ranging SEC accounting
probe that alleged the company “used improper accounting methods to
increase its reported earnings or revenues and avoid reporting negative
financial results.” The SEC cited four such instances in 2002-2003. …
The 2008 financial crisis hit GE hard. The company’s stock fell 42% during the year,
and after Welch’s departure, it became clear that GE was overstretched and
bloated. Losses by the GE Capital financial segment nearly sank the company
during the Great Recession. … The company was forced to strip down GE
Capital and return to its roots in manufacturing.”
Welch said that his effectiveness as CEO for two decades would be measured by
GE’s performance for a comparable period under his successor, hand-picked by
Welch and groomed to manage his way. However, a $100,000 investment in GE
shares in the year 2000 would have lost about 80% of its value by 2021.
Jeff Immelt Oversaw the Downfall of G.E. Now He’d Like You to Read His
Book
David Gelles, New York Times, February 5, 2021.
“There are two ways to think about Jeff Immelt’s 16-year run as chief executive of
General Electric. The charitable interpretation is that Mr. Immelt was dealt
an impossible hand. He followed the two-decade reign of Jack Welch during which
G.E. became the most valuable company in the world. … And G.E. Capital, which
Mr. Welch built into what was essentially a giant unregulated bank, was a ticking
time bomb that almost blew up during the financial crisis. …
On Mr. Immelt’s watch, G.E. stock plunged some 30 percent, wiping out more than
$150 billion in market value and obliterating the savings of thousands of G.E.
retirees. Since Mr. Immelt was pushed out in 2017, it has only gotten worse. G.E.
was dropped from the Dow Jones industrial average, its stock has continued to
slide … Once a paragon of modern management excellence, G.E. became a
punchline.
It was a stunning fall for a company that was among the country’s most admired
corporations for a century, popularizing everything from the light bulb to the
refrigerator, mass-producing televisions and washing machines, and ushering in the
modern age with jet engines, power plants and plastics used during the moon
landing.
Today G.E. still makes engines, wind turbines and medical equipment … Gone,
however, are its once-vaunted businesses in appliances, plastics, locomotives, light
bulbs, media and more. …
Was there a culture of creative accounting at G.E., where people did what they
needed to hit the numbers?
[Immelt] “The incredible strategic vein that Jack hit in the late ’80s and through
most of the ’90s was that you could take industrial cash flow, lever it eight to one,
and build a financial services business whose earnings were valued like a high-tech
industrial company. And that became so seductive to the company. The accounting
stuff and pressure, I don’t really want to go there.” ….
There’s a moment in the book when you say you felt like people weren’t rooting for
G.E., and that you don’t understand why people don’t want big business to win.
When you look at the American working class and how they’ve fared over the last
40 years, do you not understand where some of that animosity is coming from?
[Immelt] “C.E.O.s like me grew up in the era of wage arbitrage [finding the
lowest-cost labour to produce goods], where we felt like we could put jobs
anywhere we wanted to and have people still love us. Those days are long
over. I moved refrigerator manufacturing back from Mexico to the U.S.
So over time, I became cognizant that there was a reason why American society
didn’t trust business. And it had a lot to do with wage arbitrage, outsourcing things that really had a negative impact on the high-end industrial worker
that was so essential. In a town like Erie, Pa., people don’t go from working at
G.E., making $36 an hour, to working at factory X making $30 an hour. They go
from earning $36 an hour to earning $15 an hour. And that gap is a hugely
negative impact. I get that.”
Virtue Ethics – Teleopathy
We conclude with a critique of Welch in terms of virtue ethics and leadership. It
introduces the concept of Teleopathy, the unbalanced pursuit of a goal. This could
de described as the vice behind the profit-seeking paradox, when the single-minded
pursuit of success becomes self-harming because of the way it impacts other
stakeholders. There was discussion of Teleopathy in relation to the Enron scandal,
and the following paper applies it to Welch.
Phillip M. Thompson – The Stunted Vocation: An Analysis of Jack Welch’s
Vision of Business Leadership
(From Review of Business, Vol.25:1, 2004.)
“Defenders of Welch might object to any suggestion that he is all work and no
ethics. After all, he regularly proclaims the importance of “values” at G.E. It is not
readily apparent, however, what he means by such a term beyond those technical
skills such as efficiency, flexibility, creativity, etc. that make an employee more
productive and profitable. G.E.’s value statement, which Welch carried in his
pocket, emphasizes, “aggressive targets,” “excellence,” “team building,”
“competitive advantage,” “customer focus,” “change” and “energy.” …
[Welch] suffers from what the business ethicist, Kenneth Goodpaster, refers to as
“teleopathy.” Teleopathy is an “unbalanced pursuit of business in either
individuals or organizations” and begins with a “fixation” … All other values and
human traits are largely extraneous to the main reason for the product’s existence
– to be successful in the competition of work. Hence, an adherence to values
such as mercy, loyalty, compassion or equity was marginalized at G.E.
Such a “fixation” distends the normal business virtues of “determination” and
“perseverance” and breeds excessive behaviors. For example, Welch contends
that a business leader should not be a “moderate, balanced, thoughtful, articulator
of policy. You’ve got to be on the lunatic fringe.” G.E. corporate meetings were
legendary for their severity and the demeaning, ridiculing and humiliating of
the corporate leadership by the boss. Goodpaster asserts that such excessive
behaviors are often rationalized by a loyalty to the company, the need to preserve
stock price and the difficulty of competition. After all, the G.E. chief declared, “We
come to work every day on the razor’s edge of a competitive battle,” and he
justified being demanding on his employees because there were “six companies
going after every order out there.”
According to Goodpaster, the repetition of such fixation and rationalization
eventually leads to a detachment from certain ethical norms such as
“compassion” and “generosity.” Strategic corporate decisions reflected the
detachment of the leader. Wholesale firings eliminated 100,000 employees,
which was one quarter of the G.E. workforce, and the only regret from the
mastermind of such measures was that he “took too long to act,” and did not go
“far enough or move fast enough.” …
Teleopathy’s tendency to produce decisions that marginalized humane
values provided cues throughout the company as to appropriate values and
actions. According to Goodpaster, the teleopathy of a business leader is often
transmitted to the organization through the “self perpetuating dynamics of
career progression, management discipline, and corporate culture.” For example,
the massive employee dismissals led to the common perception within the
company that workers were “expendable.” The following vignettes confirm this
pattern of transmission.
* At a question and answer session at G.E. headquarters, a senior finance executive
interrupted a young, female manager, who was relating how much G.E. expected
from their employees, by shouting, “I know what your question is. Your question is
what does G.E. owe me? Well, get this straight: G.E. doesn’t owe you a damn
thing!”
* A G.E. human resources manager was approached by a manager in another
department who wanted to fire a 15-year employee who had no problems on his
record and had just received an incentive reward for good performance. When the
human resources manager suggested compassion … the blunt retort was, “_ _ _ _
compassion.” …
* In the midst of the layoffs, G.E.’s public relations campaign still touted a loyalty
to its employees in its “G.E. is me” publicity campaign. The reality was that to
survive and thrive at the new G.E., an employee had to be “tough,” “short
tempered,” “almost impervious to criticism,” “able to triumph in
Machiavellian maneuverings,” and “completely wedded to your job.” One
executive confided that going off to work in the morning at G.E. was like “going off
to war.”
During his most destructive period, Welch remained largely impervious to the
carnage resulting from his actions. In one of the less sensitive actions by a business
executive, he lavishly refurbished a perfectly good office in Manhattan as scores of
G.E. employees were emptying their desks in the same building. …
In addition to employee difficulties, there were also negative institutional
consequences from the maximum pressure exerted to execute the
corporate game plan. These examples suggest that perhaps success, and not
integrity, was the dominant principle guiding G.E. The push for success cultivated
an institutional culture that was susceptible to institutional misconduct.
Consider the following examples. …
* G.E.’s accounting practices came under general scrutiny with the publishing of
articles in business journals at the end of Welch’s reign, questioning G.E.’s
accounting practices that shifted company assets to maintain the apparent
consistency of the company’s profitability.
* There were credible allegations that G.E. abused and paid its maquiladora
employees in the Rio Grande Valley about half of what Ford Motor company pays
in the same area.
* A rush to get a new refrigerator on line with an insufficiently tested rotary
compressor resulted in corporate losses of 450 million dollars and the closing of a
plant.
* In the Welch era, G.E. and its subsidiaries were involved in a number of
regulatory and legal actions in which they were accused of skirting the law. For
example, the G.E.-owned Kidder Peabody securities firm lost one billion dollars, and
in 1994 the Security and Exchange Commission sanctioned several executives,
including a Welch crony, for accounting and records violations. G.E. was also
involved in several scandals with the Pentagon, resulting in 15 criminal and civil
convictions between 1985 and 1992.”
Obituary – Captain of Industry
Jack Welch’s obituary in The Economist begins by noting that his predecessor as
General Electric CEO once likened the company to a majestic ocean liner. Welch
declared that he wanted to run it like a speed boat, “trying to move like hell.”
But critics compared his downsizing methods to “dumping loads of bodies off
the side of the cruise ship.” An advocate of offshoring jobs, Welch said that ideally
you’d put “every plant you own on a barge” so it could float where production
costs are lowest.
Welch was “obsessed with processes” – formally rationally systems to make the
GE boat run more efficiently – that many think were substantively irrational in their
outcome. These include Rank and Yank evaluations and Six Sigma, a program
designed to reduce manufacturing defects and standardize output that critics
accuse of being too rigid and impeding breakthrough innovation.
Welch wasn’t big on investing in research and development. He cut GE’s strategic
planning department. His preferred way to rev up the company’s engines was
by deal-making, acquiring and selling off hundreds of firms, and by
recklessly financializing the company with GE Capital. This supercharged profits in
the 90’s, but masked deeper problems and ultimately caused the GE speedboat to
crash (“Captain of Industry; Jack Welch,” The Economist. Vol.434, March 7,
2020).
Welch Questions
2a. How did Welch and GE exemplify big business trends of the 1980’s and 90’s?
2b. Why was Welch once hailed as the manager of the century?
2c. Is it fair to blame Welch for GE’s decline and fall after he retired? Why or why
not?
12.3.3 Are CEOs Overpaid?
American CEO pay used to be much closer to that of the average worker. The ratio
was 21-1 in 1965 and 61-1 in 1989. But then it spiked, peaking at 366-1 in 2000
and (after some rough times for executive stock options) nearly as high at 320-1 in
2019 (Lawrence Mishel and Jori Kandra, “CEO Compensation Surged 14% in 2019
to $21.3 Million,” Economic Policy Institute, August 18, 2020).
In Canada, our 100 highest-paid CEOs were paid an average of 10,9 million in
2020, which is 191 times the average wage (David Macdonald, “Another Year in
Paradise,” Canadian Centre for Policy Alternatives, January 4, 2022).
The first piece below is a brief newspaper excerpt with some recent examples of
inflating CEO pay. The second is a case study from the 1990’s, when the CEO pay
issue really emerged, which digs deeper into the causes.
C.E.O. Pay Remains Stratospheric, Even at Companies Battered
by Pandemic
David Gelles, New York Times, April 24, 2021.
“Boeing had a historically bad 2020. Its 737 Max was grounded for most of the
year after two deadly crashes, the pandemic decimated its business, and the
company announced plans to lay off 30,000 workers and reported a $12 billion loss.
Nonetheless, its chief executive, David Calhoun, was rewarded with some $21.1
million in compensation.
Norwegian Cruise Line barely survived the year. With the cruise industry at a
standstill, the company lost $4 billion and furloughed 20 percent of its staff. That
didn’t stop Norwegian from more than doubling the pay of Frank Del Rio, its chief
executive, to $36.4 million.
And at Hilton, where nearly a quarter of the corporate staff were laid off as hotels
around the world sat empty and the company lost $720 million, it was a good year
for the man in charge. … Chris Nassetta, its chief executive, received compensation
worth $55.9 million in 2020. …
The gap between executive compensation and average worker pay has been
growing for decades. Chief executives of big companies now make, on average, 320
times as much as their typical worker, according to the Economic Policy
Institute. In 1989, that ratio was 61 to 1. From 1978 to 2019, compensation grew
14 percent for typical workers. It rose 1,167 percent for C.E.O.s.
The pandemic only compounded these disparities, as hundreds of companies
awarded their leaders pay packages worth significantly more than most Americans
will make in their entire lives.
“To my mind, they’re the logical consequence of our total embrace of
shareholder capitalism, starting with the corporate raiders of the 1980s, to the
exclusion and sacrifice of all else, including American workers,” said Robert Reich, a
labor secretary under President Bill Clinton. “The pay packages reflect soaring share
prices, which in turn reflect, at least in part, the willingness if not eagerness of
corporations to cut payrolls at the slightest provocation.”
John R. Boatright – Case 4.3: Executive Compensation
(From Ethics and the Conduct of Business, 2nd ed. Prentice Hall, 1997, p.102104.)
“The news that Michael Eisner received $203 million in 1993 for his efforts on
behalf of the Walt Disney Company was greeted with a predictable outcry about
runaway executive pay. How could anyone be worth that much in any just
economic system? Eisner’s earnings reached that astronomical figure by a one-time
exercise of accumulated stock options. In 1994, the highest paid executive received
a paltry $25.9 million … Still, the average total compensation of CEOs in 1994 at
371 companies surveyed by Business Week was more than 2.8 million, and 25
executives each received more than $10 million. …
How should executive pay be determined? One answer is that we should use
the same standards for CEOs that are generally applied to lower-level managers
and other employees; namely, the degree of responsibility involved, the
knowledge, skill, and effort required, and success in meeting certain goals.
A CEO’s compensation should be higher for those who run larger companies and
companies that face greater problems or risks. The reward for turning around a
troubled giant like IBM should be greater than that for attending to everyday
business at a heavily regulated utility, for example.
Most of all, an executive should be rewarded for doing well, which may be
reflected not only in the price of the stock but in desired changes, such as
improving customer relations or a company’s environmental record. …
That CEOs are paid more than most workers is no surprise. But how much more
should they be paid? And what should their pay be compared with? Derek Bok, the
former President of Harvard University, notes that he headed a very large and
complex organization for twenty years with relatively modest compensation. Bok
further observes that average CEO pay is two to three times the average in
industrial nations, and some American CEOs are paid ten to twelve times their
counterparts in Japan and Europe: “Are American CEOs ten or twelve, or even
two or three times better?” he asks. …
Graef Crystal, a persistent critic of executive compensation, is less concerned about
the amount of CEO pay than the lack of linkage to the usual standards.
Although sports and entertainment figures negotiate multimillion-dollar contracts,
Crystal finds that at least 70 percent of these amounts can be explained by purely
economic considerations. Thus, a star pitcher who negotiates a $10 million contract
can usually be expected to produce at least $7 million in extra revenue for the team
owner. Crystal’s studies have never been able to account for more than 40
percent of CEO pay by such factors as company size, performance, business
risk, government regulation, industry type, and location.
Crystal concludes that the pay of top executives is highly arbitrary, with some
CEOs receiving two or three times what his model indicates as “rational.” The
problem, according to Crystal, is that boards of directors, who hire the CEOs,
are not very good negotiators. Unlike team owners and movie producers, board
members have little idea of what the talent they are buying is really worth. After a
bad season, a highly paid sports star may receive much less the next year; this
seldom happens with CEOs.
Another answer to the question of how executive pay should be determined looks to
the benefit that attracting and motivating good talent can bring to the
American economy. If high compensation succeeds in placing the most competent
people in positions of business leadership, then everyone benefits. According to this
view, companies bid against each other for the best among the available
pool of management talent and that it may be worth $10 million to a company
to hire the most capable person whose success may r…
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